Kesko’s Corporate Governance

Kesko GROUP's Corporate Governance structure

The rules and the corporate governance code observed by Kesko

Kesko Corporation (Kesko or the company) is a Finnish public limited company in which the duties and responsibilities of the executive bodies are defined according to the Finnish laws. The international Kesko Group comprises the parent company, Kesko, and its subsidiaries. The company is domiciled in Helsinki.

The highest decision-making power in Kesko is exercised by the company's shareholders at the company's General Meeting. The company's shareholders elect the company's Board of Directors and auditor at the General Meeting. The Kesko Group is managed by the Board of Directors and the Managing Director, who is the President and CEO. The company uses a so-called one-tier governance model.

Kesko's decision-making and corporate governance comply with the Finnish Limited Liability Companies Act, regulations concerning publicly quoted companies, Kesko's Articles of Association, and the rules and guidelines of NASDAQ OMX Helsinki Ltd. The company complies with the Finnish Corporate Governance Code for listed companies (the Corporate Governance Code). The Corporate Governance Code can be read in full at www.cgfinland.fi. As provided by the Comply or Explain principle of the Corporate Governance Code, the company departs from the Corporate Governance Code's recommendation concerning the Board members' terms of office.

Departure from Corporate Governance Code recommendation

The terms of office of the members of Kesko's Board of Directors depart from the term of one year stated in Recommendation 10 of the Corporate Governance Code. The term of the company's Board is defined in the company's Articles of Association. The General Meeting makes decisions on amendments to the Articles of Association. According to the company's Articles of Association, the term of each Board member is three years, with the term starting at the close of the General Meeting electing the member and expiring at the close of the third Annual General Meeting after the election.

A shareholder which, together with related entities, holds over 10% of all votes carried by the Kesko shares, has informed the company's Board of Directors that it considers the term of three years good for the company's long-term development and sees no need to shorten the term of office stated in the Articles of Association.

Kesko's Corporate Governance Statement, referred to in the Corporate Governance Code, was addressed by the Audit Committee of Kesko's Board of Directors on 2 February 2011 and is available at www.kesko.fi/investors.

General Meeting

The Annual General meeting, which is held before the end of every June on a date designated by the company's Board of Directors, handles the business specified for the Annual General Meeting in the company's Articles of Association and any other proposals that may be made to the General Meeting. Kesko's Annual General Meeting has usually been held in March or April. If needed, the company may also hold an Extraordinary General Meeting.

The General Meetings are convened by the company's Board of Directors. An Extraordinary General Meeting must also be convened if shareholders with at least 10% of the shares so demand in writing in order to deal with a certain matter. As a rule, the General Meeting handles items proposed by the company's Board of Directors.

A shareholder has the right, by virtue of the Limited Liability Companies Act, to put matters that fall within the competence of the General Meeting on the agenda of the General Meeting, provided the shareholder makes a written request to the Board of Directors in time for the matter to be included in the notice of the meeting. Possible requests from shareholders to put matters on the agenda of Kesko's Annual General Meeting shall be sent to Kesko's Board of Directors not later than the date given on the company's website www.kesko.fi. The written request, together with an explanation or a draft resolution, shall be sent to Kesko Corporation, Kesko Group's Legal Affairs, FI-00016 KESKO, or by e-mail to cg@kesko.fi.

Major matters within the competence of the General Meeting

The most significant matters falling within the competence of the General Meeting include:

resolution on the number of Board members
election of Board members
resolutions on the remuneration and financial benefits of Board members and members of the Board Committees
election of the auditor and resolution on the auditor's fee
adoption of the financial statements
resolution on discharging the Board members and the Managing Director from liability
amending the Articles of Association
resolution to increase share capital
resolution on the distribution of the company's assets, such as profit distribution.

Convening the General Meeting

Shareholders are invited to the General Meeting by a notice published in at least two nationwide newspapers specifying, among other things:

the name of the company, the time and place of the General Meeting
the proposed agenda for the General Meeting
the proposals for the number and fees of Board members and, when necessary, proposals for Board members with biographical information
the proposal for the auditor
other proposals to the General Meeting
a mention of the procedures that a shareholder must comply with in order to participate in and cast votes at the General Meeting
a mention of the procedures that a shareholder must comply with in order to participate in the General Meeting by proxy
a mention of a shareholder's right to ask questions related to items on the agenda of the General Meeting
the date on which a person must be listed as a shareholder in the company's shareholder register in order to have the right to participate in the General Meeting and to cast votes at it (so-called record date of the General Meeting)
the place where the General Meeting documents and draft resolutions are available
the total number of shares and voting rights by share class at the date of convocation
the address of the company website.

The notice of the meeting is delivered no earlier than two months and no later than three weeks before the General Meeting, but at least nine days before the record date of the General Meeting, referred to in the Finnish Limited Liability Companies Act. The notice of the meeting and the proposals of the company's Board to the General Meeting are announced in a stock exchange release. The proposals for the number of Board members, for Board members and for Board members' fees made by shareholders holding at least 10% of the votes carried by the company shares are also announced in a stock exchange release. The above documents are also posted on the company's website.

The notice of the General Meeting and the following information are made available to shareholders on the company's website at least 21 days before the General Meeting:

the documents to be submitted to the General Meeting
draft resolutions of the Board or other competent body.

Right to participate in the General Meeting

Shareholders have the right to participate in the General Meeting if they are registered as shareholders in the company's register of shareholders kept by Euroclear Finland Ltd at the record date of the General Meeting separately announced by the company. Shareholders must register for the General Meeting in advance by the date given in the notice of the General Meeting, which date cannot be earlier than ten days before the meeting. Shareholders may participate in the meeting themselves, or through proxy representatives. If a shareholder has more than one securities accounts, he or she can appoint different proxy representatives to represent his or her shares held in different securities accounts. The proxy representative shall produce a proxy document or otherwise provide reliable evidence of the right to represent the shareholder. A shareholder or proxy representative can have one assistant at the General Meeting

Minutes of the General Meeting

The minutes of the General Meeting are recorded and made available to shareholders on the company website, together with voting results and appendixes relating to the resolutions of the General Meeting within two weeks from the General Meeting. Appendixes to the resolutions of the General Meeting are available on the company website only insofar they describe the actual content of the resolution. The resolutions of the General Meeting are also published in a stock exchange release immediately after the meeting.

Presence of governing bodies at the General Meeting

The company aims for all members of Kesko's Board of Directors, the President and CEO, and the auditor to be present at the Annual General Meeting. An Extraordinary General Meeting is attended by the Chair of the company's Board of Directors, a sufficient number of members of the Board and its committees, and the President and CEO. A first-time candidate for the Board of Directors is present at the General Meeting deciding on the election, unless there is a weighty reason for his or her absence.

Share series

The company has share series A and B, which differ only with respect to the votes they carry. Each A share carries the right to ten (10) votes and each B share to one (1) vote at the General Meeting. When votes are taken, the proposal supported by more than half of the votes will normally be the resolution of the General Meeting, as prescribed by the Limited Liability Companies Act. However, the Act specifies several matters, such as amendments to the Articles of Association and resolutions on directed share issues, where a resolution requires an enhanced qualified majority in relation to the number of shares and the votes they carry by law.

Kesko's Articles of Association do not include redemption clauses or voting restrictions. The company is not aware of shareholder agreements on the use of voting rights in the company, or agreements restricting the disposal of company shares.

Board of directoes and its committees

Term, composition and independence of the Board

According to the Articles of Association, the term of office of a Board member is three years, starting at the close of the General Meeting electing the member and expiring at the close of the third Annual General meeting after the election.

According to the Articles of Association, Kesko's Board of Directors consists of a minimum of five and a maximum of eight members. All members of the Board of Directors are elected by the General Meeting. The Board elects the Chair and the Deputy Chair from among its members for the whole term of the Board.

The Board of Directors elected by Kesko's Annual General meeting of 30 March 2009 consists of seven members:

Heikki Takamäki (Chair)
Seppo Paatelainen (Deputy Chair)
Maarit Näkyvä
Ilpo Kokkila
Esa Kiiskinen
Mikko Kosonen
Rauno Törrönen.

In accordance with the Articles of Association, their terms will expire at the close of the 2012 Annual General Meeting.

All of Kesko's Board members are non-executive directors.

The Board of Directors evaluates the independence of its members annually on a regular basis in accordance with recommendation 15 of the Corporate Governance Code. In the latest evaluation carried out on 22 September 2010, the Board found all members independent of the company's significant shareholders, and the majority of the members also independent of the company. A Board member is obliged to provide the Board with sufficient information to allow the Board to evaluate his or her independence, and to notify any changes in the information. A company controlled by Board members Takamäki, Kiiskinen and Törrönen each has a chain agreement with a Kesko Group company.

Principal functions

Kesko's Board of Directors ensures that the company's administration, operations and accounting as well as financial management controls are in place. The Board of Directors has confirmed the written charter for its duties, matters to be considered, meeting practice and the decision-making process. The Board of Directors considers and decides on all matters that are financially, commercially or fundamentally significant for the Group.

The Board of Directors' principal functions include:

making decisions on the Group's strategy and confirming strategies for the divisions
confirming the Group's rolling plan, which includes the capital expenditure plan
approving the Group's financial and capital expenditure policy
confirming the Group's risk management policy and considering the Group's most significant risks and uncertainties
confirming the Group's insurance policy
reviewing and adopting the consolidated financial statements, interim reports and related stock exchange releases and the report by the Board of Directors
making decisions on strategically or financially important individual capital expenditures, acquisitions, disposals or other arrangements, and contingent liabilities
making decisions on management authorisation rules
making decisions on the essential Group structure and organisation
appointing and dismissing the company's President and CEO, approving his or her managing director's service contract and making decisions on his or her compensation and other financial benefits
making decisions on the nomination, compensation and financial benefits of the Corporate Management Board members responsible for business divisions
making decisions on Kesko's remuneration plans and monitoring the implementation of the plans
preparing possible proposals to the General Meeting for share and share-based remuneration plans, and making decisions on granting shares or option rights under possible share and share-based remuneration schemes, and on the terms and conditions for granting them
establishing a dividend policy and being responsible for the development of shareholder value
confirming the company's values
reviewing the Corporate Responsibility Report
being responsible for other statutory duties prescribed to the Board of Directors by the Limited Liability Companies' Act or some other, and for duties prescribed by the Governance Code.

Decision-making, operations and meetings

The duty of Kesko's Board is to promote the best interests of Kesko and all of its shareholders. The Board members do not represent the interests of the parties who have proposed their election as Board members. A Board member is disqualified from participating in the handling of any matter between him or her and the company. When a vote is taken, the Board of Directors' decision will be the opinion of the majority. If the vote results in a tie, the decision will be the opinion supported by the Chair. If the votes cast at an election of a person end in a tie, the results will be decided by drawing lots.

The Board met 10 times in 2010, and the average attendance at meetings was 100%.

In strategy work, one of its key areas of emphasis, the Board of Directors has especially considered electronic operating models and services during the year. As in the previous years, the Board has reviewed the financial reports and actively monitored the Group's financial situation, approved the most significant capital expenditures, such as those made on store sites, monitored the progress of Group-level projects, and reviewed and approved interim reports and the financial statements based on the Audit Committee's recommendation prior to their disclosure.

The Board meetings regularly include a review by the President and CEO on topical and important issues concerning Kesko, as well as reports by the Chairs of the Board's Audit Committee and Remuneration Committee on preparatory committee meetings preceding the Board meeting. The auditor presents his findings to the Board once a year.

The Board of Directors regularly assesses its operations and working practices and carries out a related self-assessment once a year. Most recently the Board made a self-assessment of its operations and working practices in December 2010. This was based on a questionnaire, followed by the Board's discussion on the results and further actions. On the basis of the assessment, the Board decided to continue to focus especially on strategy work.

Board Committees

Kesko has a Board's Audit Committee and a Remuneration Committee, both of which consist of three Board members. At the close of the Annual General meeting, the Board elects the Chairs, Deputy Chairs and the members of the Committees from among its members for one year at a time.

All members of the Audit Committee are independent of the company and its significant shareholders. In the election of the Audit Committee members, the relevant qualification requirements have been taken into account.

All members of the Remuneration Committee are independent of the company's significant shareholders and the majority of them are also independent of the company. In the election of the Remuneration Committee members, the relevant qualification requirements have been taken into account.

The Committees regularly evaluate their operations and working practices and carry out a related self-evaluation once a year. The Board of Directors has confirmed written charters for the Committees that lay down their key duties and operating principles.

The Committees have no independent decision-making power. Instead, the Board makes decisions based on the preparation by the Committees. The Chair of the Committee reports on the work of the Committee at the Board meeting following the Committee meeting. The minutes of Committee meetings are delivered to the Board members for information.

Kesko's Board of Directors has not established any other committees in addition to the Audit and Remuneration Committees. Nor has the General Meeting established any committees or commissions.

Audit Committee and its operations

The Audit Committee members are:

Maarit Näkyvä (Ch.)
Seppo Paatelainen (Deputy Ch.)
Mikko Kosonen.

According to its charter, the functions of the Audit Committee are:

monitoring the financial situation of the Kesko Group
monitoring the reporting process of the company's financial statements
supervising the company's financial reporting process
evaluating the efficiency of the company's internal control, internal audit and risk management systems
reviewing the Corporate Governance Statement submitted by the company
reviewing the plans and reports of the company's internal audit function
monitoring the statutory audit of the financial statements and the consolidated financial statements
evaluating the independence of the company's audit firm
evaluating the non-audit services provided to Kesko by the company's audit firm and audit companies belonging to the same chain
preparing the draft resolution concerning the election of the company's auditor
taking care of contacts with the company's auditor.

The Audit Committee met five times in 2010, and its members' average attendance at meetings was 100%. At the Committee meetings, the Group's CFO, the Corporate Controller, the Chief Audit Executive and the General Counsel regularly report on their areas of responsibility to the Committee. The Committee also receives reports on the Kesko Group's financial situation, risk management and insurances. The auditor is present at the committee meetings and presents his audit plan and report to the Audit Committee.

During the year, the Committee reviewed reports on the Group's financial position, including the financial statements release and interim reports before they were released, and made a recommendation to the Board of Directors on the interim reports and the financial statements release. It reviewed the Group's external and internal audit and risk management reports, and approved the internal audit function's plan for 2011. In addition, it evaluated the auditor's independence and the offering of non-audit services to the Group, and made a proposal to the Annual General meeting on the auditor to be elected for Kesko.

Remuneration Committee and its operations

The Remuneration Committee members are:

Heikki Takamäki (Ch.)
Seppo Paatelainen (Deputy ch.)
Ilpo Kokkila.

According to its charter, the duties of the Remuneration Committee are:

preparing matters pertaining to the compensation and other financial benefits of the company's President and CEO, as well as the managing director's service contract for the company's Board of Directors
preparing matters pertaining to the compensation and other financial benefits of the Corporate Management Board members responsible for business divisions
preparing matters pertaining to the appointment of the President and CEO and the Corporate Management Board members responsible for business divisions, and identification of their possible successors
developing and preparing remuneration schemes for the company's Board of Directors, including:
evaluating the remuneration of the President and CEO and other executives, and taking care of the appropriateness of the company's remuneration schemes
preparing possible share or share-based remuneration schemes
preparing the granting of shares or option rights under share or share-based remuneration schemes, and preparing their terms and conditions
reviewing the remuneration statement in connection with the financial statements
answering questions concerning the remuneration statement at the General Meeting. Questions are primarily answered by the Committee Chair.
preparing the principles for the performance and result criteria of the remuneration schemes, and monitoring their implementation and evaluating their impact on Kesko's long-term financial success.

The Remuneration Committee met four times in 2010, and the members' average attendance at meetings was 100%. The committee prepared a proposal to the Board of Directors for a new longer term incentive plan targeted to the Group's management and other key personnel, and the principles of the management's performance bonus scheme. It also monitored the development of Kesko's management resources among other things.

More information on Kesko's Board members is available on Board of Directors page or at www.kesko.fi.

Attendance at meetings by the members of Kesko's Board and its Committees in 2010
			Attendance
	Committee membership	Board	Audit Committee	Remuneration Committee
Heikki Takamäki (Ch.)	Remuneration Committee (Ch.)	10/10	-	4/4
Esa Kiiskinen		10/10	-	-
Ilpo Kokkila	Remuneration Committee	10/10	-	4/4
Mikko Kosonen	Audit Committee	10/10	5/5	-
Maarit Näkyvä	Audit Committee (Ch.)	10/10	5/5	-
Seppo Paatelainen (Dep. Ch.)	Audit Committee (Deputy Ch.), Remuneration Committee (Deputy Ch.)	10/10	5/5	4/4
Rauno Törrönen		10/10	-	-

Independence of the Board members in 2010*	Independence of the company	Independent of a significant shareholder
Heikki Takamäki (Ch.)	No**	Yes
Esa Kiiskinen	No**	Yes
Ilpo Kokkila	Yes	Yes
Mikko Kosonen	Yes	Yes
Maarit Näkyvä	Yes	Yes
Seppo Paatelainen (Deputy Ch.)	Yes	Yes
Rauno Törrönen	No**	Yes
* Based on independence evaluation of 22 Sept. 2010. ** Entities controlled by each of Kiiskinen, Takamäki and Törrönen have a chain agreement with a Kesko Group company.

Company management

President and CEO

Kesko has a managing director who is the President and CEO. Kesko's President and CEO is Matti Halmesmäki, M.Sc. (Econ.), LL.M. He has been Kesko's President and CEO since 1 March 2005.

The President and CEO is responsible for the management of the company in accordance with the instructions and orders issued by the company Board, and for informing the Board about the developments in the company's business operations and financial situation. He is also responsible for the company's day-to-day management and that the financial matters are handled in a reliable manner. The President and CEO also chairs the Corporate Management Board and the Boards of the Group's major subsidiaries, such as Kesko Food and Rautakesko.

The President and CEO is elected by the Board of Directors, which also decides on the terms of the President and CEO's service contract. A written managing director's service contract, approved by the Board, has been made between the company and the President and CEO.

More information on Kesko's President and CEO is available on Corporate Management Board page or at www.kesko.fi.

Corporate Management Board

The Kesko Group has a Corporate Management Board, the Chair of which is Kesko's President and CEO.

The Corporate Management Board has no authority based on legislation or the Articles of Association. The Corporate Management Board is responsible for considering Group-wide development projects and Group-level policies and practices. In addition, the Corporate Management Board discusses the Group's and the division parent companies' business plans, profit performance and matters handled by Kesko's Board of Directors, in whose preparation it also participates. The Corporate Management Board meets 8–10 times a year.

More information on Kesko's Corporate Management Board is available on Corporate Management Board page or at www.kesko.fi.

Subsidiary management

The Board members of Kesko's most significant subsidiaries are chosen from among the Kesko Group executives. They are not paid separate fees for acting as subsidiary Board members. The most important functions of subsidiary Boards include the preparation of the companies' and their sub-groups' strategies, operating plans and budgets, as well as making decisions on capital expenditures, company acquisitions and contingent liabilities within the authorisations granted by Kesko's Board of Directors.

Remuneration statement

Remuneration of the Board of Directors and its Committees

The Annual General Meeting adopts resolutions on the fees and other financial benefits of the members of the Board and its Committees annually. The remunerations of the members of the Board and its Committees are paid in cash. The Board members have no share or share-based compensation plans. Nor are they included in other remuneration schemes or pension plans.

Remuneration of the President and CEO and other executives

Remuneration principles and the decision-making process

The remuneration scheme of the President and CEO and other members of the Corporate Management Board consists of a non-variable monetary salary (monthly salary), fringe benefits (free car and mobile phone benefit), a performance bonus based on criteria set annually (short-term compensation scheme), the 2007 option scheme (long-term compensation scheme) and the executives' retirement benefits. In 2010, the company did not operate any share-based compensation plans.

Based on the Remuneration Committee's preparation, Kesko's Board of Directors makes decisions on the individual compensation, other financial benefits, the performance bonus system criteria and the bonuses paid to the President and CEO and the Corporate Management Board members responsible for business divisions. As for the other Corporate Management Board members, Kesko's Board of Directors makes decisions on the performance bonus principles. The Board also monitors the implementation of the compensation plan.

The President and CEO makes decisions on the compensation and other financial benefits of Corporate Management Board members other than those responsible for business divisions within the limits set by the Chair of the Remuneration Committee.

In 2010, the President and CEO and the members of the Corporate Management Board did not have share-based compensation plans.

Corporate Management Board members and responsibility areas in 2010
	Since	Responsibility area
Matti Halmesmäki, Ch.	1.1.2001	Kesko’s President and CEO
Terho Kalliokoski, President of Kesko Food Ltd	17.3.2005	Food trade
Jari Lind, President of Rautakesko Ltd	1.3.2005	Building and home improvement trade
Matti Leminen, Senior Vice President, Home and Speciality Goods Division	1.1. 2007	Home and speciality goods trade
Pekka Lahti, President of VV-Auto Group Oy	1.3.2005	Car and machinery trade
Arja Talma, Senior Vice President, CFO of Kesko	17.3.2005	Finance and accounting
Riitta Laitasalo, Senior Vice President, Human Resources of Kesko	1.1.2001	Human resources
Paavo Moilanen, Senior Vice President, Corporate Communications of Kesko	13.10.2005	Corporate communications and responsibility

Performance bonus scheme (short-term compensation plan)

Kesko operates a management performance bonus scheme. In addition to the Corporate Management Board, it covers about 90 people in the Kesko Group management. The performance bonuses determined annually are paid after the completion of the annual financial statements, at the end of March following the year of determination. Kesko's Board of Directors makes decisions on the performance bonus criteria annually. The criteria basically comprise the Group's profit before non-recurring items and tax (weight 20–40%), the economic value added of the director's responsibility area, operating profit excluding non-recurring items, net sales performance, customer and personnel indicators (weight 20–40%), reaching personal targets, and a component based on superior's overall evaluation (40%). The bonus criteria and their weights vary depending on duties.

The maximum performance bonus of Kesko's President and CEO corresponds to his monetary salary for eight months excluding fringe benefits, and that of the other members of the Corporate Management Board, the salary of 4–5 months, depending on the profit impact of each position. The performance bonus of a Corporate Management Board member is determined based on the monetary salary of the last month of the calendar year the result of which is the basis of the bonus.

The implementation of performance and result criteria and their impact on long-term financial success are monitored and assessed by Kesko's Board of Directors and the Remuneration Committee.

According to the rules of the performance bonus scheme, service or an equal period of time in the Group company serving as the present employer, must have lasted at least six calendar months during the calendar year for which the bonus is paid. A performance bonus is not paid to a person whose employment terminates before the date of payment.

Option scheme (long-term compensation plan)

In addition to the performance bonus scheme, Kesko operates the 2007 option scheme for the Group management and other key people. The 2007 option scheme includes an obligation placed by Kesko's Board of Directors on option recipients to use 25% of their option income to acquire company shares for permanent ownership. Kesko's Board of Directors makes decisions on the granting of option rights on the basis of proposals made by the Remuneration Committee and within the terms and conditions of the option scheme resolved by the company's General meeting. The option scheme does not contain terms or conditions that would limit the option recipients' income from option rights.

Read more about Kesko's 2007 option scheme terms from Shares and shareholders page or at www.kesko.fi.

Notice period and termination compensation

If given notice by the company, the President and CEO and the other Corporate Management Board members are entitled to a monetary salary for the period of notice, fringe benefits and a separate non-recurring termination payment determined on the basis of the executive's monetary salary and fringe benefits for the month of notice. The termination payment and granted option rights, or income from them are not part of the executive's salary and they are not included in the determination of the salary for the period of notice, termination payment or, in case of retirement, pensionable salary. If an executive resigns, he is only entitled to a salary for the period of notice and fringe benefits. When a service terminates due to retirement, the executive is paid a pension based on the service contract without other benefits.

Retirement benefits

The President and CEO and the other members of the Corporate Management Board, except for one, belong to the Kesko Pension Fund's department A, which was closed in 1998. Their retirement benefits are determined in accordance with its rules, and their service contracts. They have defined retirement benefit plans. One of the members has joined Kesko after 1998, and her pension is determined based on the Employees' Pensions Act (TyEL).

Annual and meeting fees paid to board members for Board and Committee work in 2010 (€
		Meeting fees
Annual fees		Board	Audit Committe	Remuneration Committee	Total, €
Heikki Takamäki (Ch.)	80,000	5,000	-	2,000	87,000
Esa Kiiskinen	37,000	5,000	-	-	42,000
Ilpo Kokkila	37,000	5,000	-	2,000	44,000
Mikko Kosonen*	37,000	5,000	2,000	-	44,000
Maarit Näkyvä	37,000	5,000	4,000	-	46,000
Seppo Paatelainen	50,000	5,000	2,000	2,000	59,000
Rauno Törrönen	37,000	5,000	-	-	42,000
Total	315,000	35,000	8,000	6,000	364,000
*In addition, Idexia Oy, a company controlled by Mikko Kosonen, was paid €5,000 for consultation services in 2010.

Board’s annual and meeting fees in 2006–2010, resolved by the Annual General Meeting (€)

		Fee/year
Annual fee	2009–2010	2006–2008
Chair of the Board	80,000	60,000*
Deputy Chair of the Board	50,000	42,000*
Member of the Board	37,000	30,000*
* Monthly fees resolved in 2006–2008 have been converted into annual fees.

Meeting fees	2009–2010	Fee/meeting 2006–2008
Fee for a Board meeting	500	500
Fee for a Committee meeting	500	500
Chair's fee for a Committee meeting if he/she is not also the Chair or the Deputy Chair of the Board	1,000	1,000

President and CEO Matti Halmesmäki
Salaries, performance bonuses and fringe benefits in 2008–2010 (€)
	2010		2009	2008	Retirement benefits
Non-variable salary	605,100		569,300	541,100	The President and CEO is a member of the Kesko Pension Fund's department A and his retirement benefits are determined based on the department's rules and his managing director's service contract. His retirement age is 60 and his retirement benefit is based on a defined benefit plan. At retirement, his pension is 66% of his pensionable salary. The pensionable salary is determined based on his non-variable salary, performance bonuses and fringe benefits for the last 10 years.
Performance bonuses*	227,500		152,250	280,000
Fringe benefits	22,560		23,014	17,460
Total	855,160		744,564	838,560
* Based on the previous year's performance.
					Notice period and termination payment
					If the President and CEO's service contract is terminated by the company, he is paid a 6-months' salary and a separate lump sum termination payment, which represents his 12-months' salary and fringe benefits (a total of 18 x termination month's salary + fringe benefits). If the President and CEO resigns, he is entitled to a salary for the notice period.

Option rights granted in 2007–2010 (pcs)
Option right (symbol)	2010	2009	2008	2007	Vesting period*	Ownership obligation
2007A	-			50,000	4/2007–4/2010	25% of income from option rights must be used to acquire company shares for permanent ownership.
2007B	-		50,000		4/2008–4/2011
2007C	-	50,000			4/2009–4/2012
Total	-	50,000	50,000	50,000	*Period during which option rights cannot be transferred or used for share subscription.

Salaries, performance bonuses and fringe benefits of Corporate Management Board members in 2009–2010 (€)
Cash basis	Non-variable salary		Performance bonuses		Fringe benefits		Total
Cash basis	2010	2009	2010	2009	2010	2009	2010	2009
Matti Halmesmäki	605,100	569,300	227,500	152,250	22,560	23,014	855,160	744,564
Corporate Management Board*	1,515,860	1,415,291	244,250	93,650	112,080	112,441	1,872,190	1,621,382
Total	2,120,960	1,984,591	471,750	245,900	134,640	135,455	2,727,350	2,365,946
* Excl. President and CEO Matti Halmesmäki

Accrual basis	Non-variable salary		Performance bonuses		Fringe benefits		Total
Accrual basis	2010	2009	2010	2009	2010	2009	2010	2009
Matti Halmesmäki	605,100	569,300	339,500	227,500	22,560	23,014	967,160	819,814
Corporate Management Board*	1,515,860	1,415,291	438,500	229,250	112,080	112,441	2,066,440	1,756,982
Total	2,120,960	1,984,591	778,000	456,750	134,640	135,455	3,033,600	2,576,796
* Excl. President and CEO Halmesmäki The tables provide an analysis of performance bonuses according to cash basis (performance bonus paid in the year in question) and accrual basis (performance bonus accrued in the year in question). The accrual based performance bonuses have been paid or will be payable the next year.

Option rights granted to Corporate Management Board members in 2007–2010 (pcs)*
Year of grant Option right (symbol)	2010	2009 (2007C)	2008 (2007B)	2007 (2007A)
Matti Halmesmäki, Ch.	-	50,000	50,000	50,000
Terho Kalliokoski	-	30,000	25,000	25,000
Jari Lind	-	25,000	25,000	25,000
Matti Leminen	-	20,000	20,000	20,000
Pekka Lahti	-	20,000	20,000	20,000
Arja Talma	-	25,000	25,000	25,000
Riitta Laitasalo	-	15,000	15,000	15,000
Paavo Moilanen	-	15,000	15,000	15,000
Yhteensä	-	200,000	195,000	195,000
* The option rights 2007A-2007C include an obligation set by Kesko's Board to option recipients to use 25% of the proceeds from their option rights to buy company shares for permanent ownership. The vesting periods (during which option rights cannot be transferred or used for share subscription) are as follows: 2007A: 4/2007–4/2010; 2007B: 4/2008–4/2011; 2007C: 4/2009–4/2012.

Retirement benefits, notice periods and termination payments of Corporate Management Board members
	Retirement pension age	Pension as percentage of pensionable salary (%)	Period of notice	Termination payment
Matti Halmesmäki, Ch.	60	66	6 mo	12 mo salary	If the company terminates the director's service contract, he/she is paid a 6 months' salary for the period of notice and a separate lump sum termination payment representing his/her 6–12 months' non-variable salary and fringe benefits (a total of 12–18 x salary for the month of termination + fringe benefits). If the director resigns, he/she is entitled to a salary for the period of notice.
Terho Kalliokoski	62	66	6 mo	6 mo salary
Jari Lind	62	66	6 mo	6 mo salary
Matti Leminen	60	66	6 mo	12 mo salary
Pekka Lahti	62	66	6 mo	12 mo salary
Arja Talma	Based on TyEL*	Based on TyEL*	6 mo	6 mo salary
Riitta Laitasalo	60	66	6 mo	12 mo salary
Paavo Moilanen	60	66	6 mo	12 mo salary

Except for Arja Talma, the executives are members of the Kesko Pension Fund. Their retirement ages and pensions are determined based on the department's rules and each of their service contracts. Their retirement benefits are based on a defined benefit plan. *TyEL = the Employees' Pensions Act

Risk management, internal control and internal audit

Risk management

Risk management is an integral part of management in Kesko

Kesko’s risk management is proactive and an integral part of management and day-to-day activities. The objective of Kesko’s risk management is to ensure the implementation of the Group strategy, the delivery of customer promises, shareholder value, and the continuity of business. Efficient risk management is a competitive advantage for Kesko.

The risk management policy confirmed by the Board of Directors guides risk management in the Kesko Group. The policy, based on the COSO ERM Framework, defines the objectives, principles, responsibilities and key practices of risk management. Kesko divides risks into strategic, financial, operational and damage/loss risks. In the Kesko Group, a risk is defined as any kind of uncertainty that may lead to:

a failure to exploit business opportunities
events or reasons which prevent or hinder the attainment of objectives or have other harmful consequences.

Risk management principles in the Kesko Group:

We set objectives relating to risks and opportunities for the divisions and functions.
We take calculated risks within the limits set in strategy selections, e.g. in expanding business operations, in strengthening market position and power, and in creating new business. Risk appetite is aligned with determined risk tolerance.
We avoid or reduce financial, operational and damage/loss risks.
We ensure a safe shopping environment and product safety for our customers.
We create a safe working environment for our employees.
We minimise opportunities for unhealthy phenomena, crime or malpractice through operating principles and controls.
The continuity of operations is ensured by safeguarding critical functions and the resources they require.
Crisis management and continuity plans are prepared in case any risks are realised.
Risk management costs and resources are proportionate to the obtainable benefits.
Information on risks and risk management is provided to stakeholders in accordance with Kesko's corporate governance principles.

The Group has a uniform risk assessment and reporting system

The Kesko Group applies a business-oriented and comprehensive approach to risk assessment and management.
This means that key risks are systematically identified, assessed, managed, monitored and reported as part of business operations at the Group, division, company and unit levels in all of Kesko's operating countries. Risk identification and assessment play a key role in Kesko's strategy work and rolling planning. In addition, risk assessments are made of significant projects related to capital expenditures or changes in operations.

Kesko has a uniform risk assessment and reporting system. Risks are identified and prioritised by assessing the impact and probability of their materialisation, and the level of management. The most significant risks are analysed in more detail to find out causes and effects. Risk responses, schedules and responsible persons are determined in order to manage the risks. The risks classified as critical and responses to them are quarterly considered by the management boards. The development of a risk situation is assessed on the basis of the progress made through these actions and changes in external factors. In risk assessment, the time span is one year, except for strategic risks where the span is three years. The outcome of risk assessments is a clear picture of the scope, mutual relations and expected trends of the risks.

Responsibilities and roles in risk management

The business division and Group unit managements are responsible for risk management implementation. Each division has appointed a management board member, usually the finance director, to be responsible for coordinating risk management and security and providing guidelines in each respective division and reporting on risk management responses. In addition, each of the food trade, the building and home improvement trade, and the home and speciality goods trade divisions has a risk manager, who is responsible for the development and control of risk management and security in the division, in cooperation with the business management and supporting functions.

Kesko has a Group-level Risk Management Steering Group, which is chaired by the Group's President and CEO, and composed of the representatives of the management of the various divisions and Group functions. The Steering Group considers the operating principles and key policy definitions concerning risk management and safety and security, and assesses and monitors the Group's risks and safety situation, and the efficiency of risk management responses.

The Group's risk management function controls and coordinates the development of joint risk management and security procedures, the adoption of best practices in the Group, and is responsible for risk reporting to the Group's management.

The divisions report on risks and changes in risks to the Group's risk management function on a quarterly basis. On the basis of the reports, the Group's risk management function prepares the Group's risk map presenting the most significant risks and their management.

The Group's risk map, the most significant risks and uncertainties, as well as changes in and responses to them are reported to the Kesko Board's Audit Committee in connection with considering the interim reports and the financial statements. The Audit Committee's report includes a report on risk management by the Chair of the Audit Committee to the Board of Directors. Kesko's Board of Directors considers the most significant risks and the responses required to control them, and assesses the efficiency of risk management. The most significant risks and uncertainties are reported to the market by the Board of Directors in the financial statements, and changes in them in interim reports.

The management of financial risks is based on the Group's finance policy, confirmed by Kesko's Board of Directors. The Group Treasury is centrally responsible for funding, liquidity management, debt investor relations and the management of financial risks.

The internal audit function annually assesses the efficiency of the Group's risk management and reports on it to the Audit Committee of Kesko's Board of Directors.

Providing insurance cover is part of Kesko's risk management

Providing insurance cover is part of Kesko's risk management, and the policy confirmed by Kesko's Board of Directors defines the principles of providing insurance. The objective is to ensure that the Group's personnel, assets, business operations and liabilities have appropriate and economical insurance cover, while taking account of legislative requirements and the Group's risks and risk tolerance at any time. The Group's risk management function is responsible for providing Group-level insurance programmes, for their competitive tendering and for brokerage services as part of the Group's damage/loss risk management.

Risk management responses in 2010

The Group's risk management function and internal audit function have been cooperating increasingly, which improves the risk orientation of the internal audit function. The risk assessment of the strategy process has been developed to include missed business opportunities in risks. A more concrete approach has been adopted in risk reporting. The number of project specific risk assessments increased. In autumn 2010, the Group's risk management function held, jointly with the Group's legal affairs and internal audit functions, training sessions focusing on Kesko's responsible operating principles in foreign subsidiaries. The participants totalled 60 people representing subsidiary managements.

For the purpose of improving occupational safety, an extensive inquiry for the assessment of the risks at work was carried out in Finland towards the end of the year. At the next stage, the identified risk factors will be assessed in more detail and location or unit specific measures will be determined. Kesko participated in a research project promoting the safety of shopping centres. The research results will be used in the development of safety in stores. A model for the safety audits of Kesko's business premises has been established.

In the spring, competitive tendering of the Group's non-life insurances was arranged. As a result, the total amount of premiums decreased without compromising the insurance cover. New forms of cooperation have been sought and adopted jointly with insurance partners, aimed to support Kesko's proactive risk management work.

Focal areas of risk management in 2011

Kesko’s risk management will continue to prevent damages and malpractice, to maintain and test continuity plans, and to provide cost-efficient insurance services. Management’s crisis exercises will continue to be arranged.

The risk management function will continue working in close cooperation with other Group units, especially with the internal audit, legal affairs, human resources, accounting, treasury and IT functions in order to ensure the adoption of, for example, responsible operating practices, and to improve personnel safety and to develop risk management related to information security and data protection.

The most significant risks and their management responses

Risks and uncertainties impacting Kesko’s business operations, uncertainties and their management responses, as well as the organisation and principles of Kesko's risk management are described on Kesko's website at www.kesko.fi and in the Report by the Board of Directors.

Financial risks are described in accordance with the IFRS in note 41 to Kesko's financial statements for 2010.

Kesko group's risk management organisation

Internal control

Internal control is an active part of Kesko's management, administration and day-to-day operations. The President and CEO and the Board of Directors are ultimately responsible for the organisation of internal control. The Audit Committee of Kesko's Board of Directors has confirmed Kesko's internal control policies, which are based on good control principles, widely accepted internationally (COSO).

Internal control refers to all proactive operations, daily and subsequent control, aimed to ensure the achievement of business objectives. Kesko's values, operating principles and the company strategy and objectives form the basis of internal control as a whole. Kesko's operating principles have been communicated to the Kesko employees in the guide 'Our Responsible Working Principles'. Daily controls include working instructions and system controls, as well as the definition and differentiation of responsibilities and powers, job specifications, approval authorisations and substitute procedures and financial reporting. Internal audit and auditors are part of subsequent control.

The objective of internal control is to ensure profitable and effective operations, reliable financial and operational reporting, compliance with laws, regulations and agreements, and security of assets and information.

Internal audit

Kesko's internal audit function is responsible for the Group's independent evaluation and assurance function required of a listed company, which systematically examines and verifies the efficiency of risk management, control, management and administration. The management and the organisation are supported to ensure that Kesko's objectives are achieved, and to develop the control system. The Audit Committee of Kesko's Board of Directors has approved the internal audit function's operating instructions.

Organisation of the audit function

The internal audit function is organised under Kesko's President and CEO and the Audit Committee, and it reports on its findings and recommendations to the Audit Committee, the President and CEO, the management of the audited operation, and the auditor. The function covers all of Kesko's divisions, companies and functions.

The internal audit function is organised in the foreign audit, the Group audit and the IT audit units and has a staff of 10. Auditing is based on risk analyses and control discussions with the Group's and divisions' managements. An internal audit plan, subject to approval by the President and CEO and the Audit Committee, is prepared annually. The annual plan is modified on a risk basis, if necessary.

The internal audit function cooperates with the Group's risk management functions and participates in the work of the Risk Management Steering Group. The internal audit function assesses the efficiency of Kesko's risk management system annually.

Internal audit operations in 2010

In 2010, the areas of emphasis of the internal audit function included foreign operations and information system audits. The audits of foreign operations concentrated on the implementation of changes in business operations, stocks and selections management, and basic controls. In information system audits special attention was paid to new systems projects, continuity and information security. Compliance with Kesko's accounting policies and reporting guidelines was verified and assessed in audits conducted in Finland and abroad. The audits increasingly leveraged data extraction and analysing software. Especially in information system audits, the focus was increasingly placed on service providers.

Focal areas of internal audit in 2011

The emphasis in the audit operations of the internal audit function in 2011 will be placed on changes in business operations, purchasing controls, malpractice risks, new IT systems, information security and continuity, as well as the adoption of electronic processes. An external quality assurance evaluation will be conducted in 2011 for the purpose of developing the audit function further.

Ensuring professional competence

According to its operating instructions, the internal audit function must have sufficient resources, the required knowledge, skills and other competencies for performing its duties. The auditors' competencies are maintained by internal and external professional education and examinations. Kesko's internal audit function currently has five employees with the international qualification of Certified Internal Auditor. In addition, three auditors have the qualification of Certified Information Systems Auditor, and one auditor has the qualification of a Certified Information Systems Security Professional.

The extent and expertise of auditing is ensured and coordinated by regular contacts and exchange of information with the Group's other assurance functions and auditors. In addition, the internal audit functions purchases external services to perform assessments requiring special expertise, as necessary. The Group's own specialists are also used in audit-specific additional resourcing.

Outline of internal control and risk management systems related to the Group’s financial reporting

Kesko’s management system

Kesko’s financial reporting and planning are based on the Kesko Group’s management system. The Group units’ financial results are reported and analysed inside the Group on a monthly basis, and disclosed in interim reports released quarterly. Financial plans are prepared for quarterly periods, in addition to which significant changes are taken into account in the monthly performance forecasts. The Group’s and its units’ strategies and related long-term financial plans are updated annually.

Fig 1. The Kesko Group’s management system

Roles and responsibilities

The Kesko Group’s financial reporting and its control is divided between three organisational levels. The subsidiaries analyse and report their figures to the respective divisions, which then report the division-specific figures to Corporate Accounting. Analyses and controls for ensuring the correctness of reporting are used at each level.

The correctness of reporting is ensured by using different automated and manual controls at every reporting level. In addition, the income statement and balance sheet are analysed by controllers at subsidiary, division and Group level every month. The implementation of analyses and controls is supervised on a monthly basis at company, division and Group level.

Planning and performance reporting

The Group’s financial performance and the achievement of financial objectives are monitored via Group-wide financial reporting. Monthly performance reporting includes Group, division and subsidiary specific results, changes compared to the previous year, comparison with financial plans, and forecasts for the next 12 months. The Group’s short-term financial planning is based on plans drawn up by the quarter, extending for the following 15 months. The financial indicator for growth is sales performance, while that for profitability is operating profit excluding non-recurring items as well as the accumulation of economic value added, monitored via monthly internal reporting. In the calculation of economic value added, the requirements concerning return on capital are determined annually on market terms, and the return requirements take account of risk-related division and country specific differences. Information on the Group’s financial situation is communicated in interim reports and the financial statements release. The Group’s sales figures are published in a stock exchange release each month.

Financial planning takes place at the subsidiary, division and the Group level as rolling plans, each for a 15-month period, are made. The plans are updated quarterly, and any significant changes are taken into account in the performance forecasts reported monthly. Any deviations between the plan and the actual result are analysed by the company, division and Corporate Accounting, and the reasons are reported to the division and Corporate Accounting every month.

The performance reports provided monthly for the Group’s top management comprise the subsidiaries’, divisions’ and the consolidated income statements and balance sheets. Each subsidiary is primarily responsible for the financial reporting and the correctness of its figures. The controlling function of each division analyses the figures for the whole division for which the division's financial management is responsible. The Group is responsible for the figures for the whole Group. The income statement and the balance sheet are analysed monthly at the company, division and Group level, based on the documented division of duties and specified reports. This enables a real-time knowledge of the financial situation, as well as real-time response to possible defects. The performance reports provided for the top management also include Group level monitoring of sales on a weekly, monthly and quarterly basis.

Public performance reporting comprises interim reports, the annual financial statements release and monthly sales reports. The same principles and control methods are applied to the public performance reporting as to the monthly performance reporting. The Audit Committee reviews the interim report and the financial statements and gives a recommendation on their approval to the Board of Directors. The Board of Directors approves each interim report and the financial statements before they are published.

Key procedures in 2010

Early in the year, the Kesko Group launched a project for harmonising the financial management information systems, which serves both the Group companies and the K-Group's retailers. The resulting financial management system will be part of the Group's financial reporting system. In addition, the K-Group's financial management processes and the control environment will become uniform.

During the year, the chip & pin card payment project was continued in order to introduce new payment terminals in all K-Group stores. A centralised card payment solution is reliable, secure and meets the requirements of standards related to card payment.

The adoption of a shared planning system, which was begun last year, was continued. The project will harmonise the Group companies' planning systems and integrates them in the Group's reporting system.

Procedures in 2011

In 2011, the financial management function will concentrate on the development of the operations of the Kesko Group's shared service centre, the information system project serving the K-Group and its adoption. In addition, the chip & pin card payment project will be continued as well as the adoption of an electronic invoicing system and planning system.

Accounting policies and financial management IT systems

The Kesko Group has adopted the International Financial Reporting Standards (IFRSs) endorsed by the European Union. The accounting policies adopted by the Group are included in the accounting manual, updated as the standards are amended. The manual contains guidelines for stand-alone companies, the parent company, and instructions for the preparation of consolidated financial statements.

The Kesko Group’s financial management information is generated by division-specific enterprise resource planning systems, via a centralised and controlled common interface, into the Group’s centralised consolidation system, to produce the Group’s main financial reports. The key systems used in the production of financial information are certified and secured by back-up systems, and they are controlled and checked regularly to ensure reliability and continuity.

Audit

According to the Articles of Association, Kesko has one auditor, which shall be an audit firm authorised by the Central Chamber of Commerce. The Audit Committee prepares a proposal for the company's auditor to the General Meeting. The Audit Committee also evaluates the auditors' operations and services annually. The term of an auditor is the company’s financial period and an auditor’s duties terminate at the close of the Annual General Meeting following the election. As a rule, a network firm of the audit firm represented by the auditor elected by Kesko's General Meeting acts as the auditor of the Group's foreign subsidiaries.

The auditor presents the audit report required by law to Kesko's shareholders in connection with the company's financial statements and regularly reports its findings to the Audit Committee of Kesko's Board of Directors.

The 2010 Annual General Meeting elected PricewaterhouseCoopers Oy, Authorised Public Accountants, as the company's auditor, with APA Johan Kronberg as the auditor with principal responsibility. The Annual General Meeting resolved that the auditor's fee is paid and expenses are reimbursed according to invoice approved by the company.

According to the applicable law, a person can act as the auditor with principal responsibility for a maximum of seven (7) successive years. The law does not limit the term of an auditing firm.

Auditors’ fees in 2009–2010 (€ thousand)
	2010				2009
	PwC		Other audit firms	Total	PwC		Other audit firms	Total
	Kesko Corporation	Other Group companies			Kesko Corporation	Other Group companies
Auditing	106	828	59	993	129	717	63	909
Tax consultation	84	31	17	132	16	48	50	114
IFRS consultation	3	-	2	5	6	-	2	8
Other services	59	64	82	205	82	74	101	257
Total	252	923	160	1,336	233	839	216	1,288

Insider administration

Kesko’s insider regulations

Kesko complies with the insider guidelines of NASDAQ OMX Helsinki Ltd. Kesko’s Board of Directors has confirmed Kesko’s insider regulations for permanent and project-specific insiders. The contents of the regulations correspond with the insider rules of NASDAQ OMX Helsinki Ltd. Kesko’s insider regulations have been distributed to all insiders.

Kesko’s permanent insiders and insider registers

In accordance with the Securities Markets Act, Kesko’s permanent public insiders include Kesko’s Board members, the President and CEO (managing director), and the audit firm’s auditor with principal responsibility for Kesko. Kesko Corporation’s Board of Directors has also stipulated that, in addition to the President and CEO, the other members of the Corporate Management Board are regarded as the company’s permanent public insiders. All permanent public insiders and the statutory information about them, their related parties and the corporations that are controlled by related parties, or in which they exercise influence, have been entered in Kesko’s register of public insiders.

Other permanent insiders of Kesko include persons working in positions determined by the Board of Directors who, in their duties, receive insider information on a regular basis and who are thus entered in the company’s own, non-public insider register. Kesko’s company-specific insider register is divided into sub-registers that consist of permanent insiders and of possible insider projects and persons participating in their preparation.

Monitoring

The Group’s legal affairs function monitors the compliance with insider guidelines and maintains the company’s insider registers in cooperation with Euroclear Finland Ltd. At regular intervals, the legal affairs function delivers an extract of the information in the insider register to permanent public insiders for checking and monitors the compliance with permanent insiders’ trading restrictions. Kesko’s permanent insiders are not allowed to acquire or dispose of securities issued by the company, including securities or derivative financial instruments entitling to them, during 21 days prior to the disclosure of interim reports and during 28 days prior to the disclosure of the annual financial statements. These disclosure dates are announced annually beforehand in a stock exchange release. Furthermore, people involved in possible insider projects may not trade in Kesko’s securities or derivative financial instruments during such a project.

Further information on the holdings of Kesko’s permanent public insiders is available on Board of Directors page and at www.kesko.fi.

Other matters

Stock exchange communications and stock exchange releases

The Group’s Senior Vice President, CFO is responsible for the financial content of stock exchange releases, and for investor communications. The Corporate Communications and Responsibility Unit produces the Group level communications material and is responsible for stock exchange and financial communications. The Vice President, General Counsel is responsible for ensuring that the rules related to stock exchange communications are observed by Kesko.

In its investor communications, Kesko follows the principle of impartiality and publishes all investor information on its website at www.kesko.fi in Finnish and English. Kesko observes a three (3) week period of silence before disclosing information on its financial results.